Income strategies in a low income world
- Published: August 21, 2019
- Author: Mark Buisman
The Reserve Bank of Australia has made two cash rate cuts so far in 2019 in June and July and some economists believe more cuts are on the cards. This is a salient factor when allocating funds to fixed interest investments.
Fixed interest investments traditionally make up the defensive component of a client’s portfolio. These instruments are typically income-producing assets that generate a premium above cash. They include term deposits, government and corporate bonds and, further up the risk curve, investments such as corporate debt. Additionally, many retail investors allocate the fixed interest component of their fund to managed funds and exchange-traded funds, which allow them to gain access to this asset class, while also achieving diversification benefits and removing the risk of investing in individual assets.
Fixed interest returns still attractive
Although interest rates have dropped in Australia, returns from fixed interest investments remain attractive when considering the total return of the asset class. As rates come down the underlying asset value appreciates as coupon payments reduce in line with falling rates. As a result, many fixed interest fund managers have generated healthy returns of between 7% and 9% over the past 12 months.
Returns aside, clients, especially those in the pension stage, often allocate two to three years’ worth of income to the fixed income component of their portfolio. This allows them to draw down on this component of their portfolio during times of market volatility. It also means they are not forced to sell growth assets when values are in decline to fund their lifestyle. Subsequently, they have the opportunity to rebalance their portfolio when markets recover to bring it into line with their risk profile.
It’s important to get the balance right between defensive and growth assets through the market cycle. What’s important is to invest with a long-term view in mind, taking into account your risk profile and time of life.
The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Lanyon Partners cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.